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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission file number 000-1837
FEDERAL SCREW WORKS
(Exact Name of Registrant as Specified in Its Charter)
MICHIGAN 38-0533740
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
20229 NINE MILE ROAD, ST. CLAIR SHORES, MICHIGAN 48080
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: 586-443-4200
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1 par value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes [ ] No [X]
As of December 31, 2003, the last business day of the registrant's most recently
completed second fiscal quarter, the aggregate market value of the common stock
of the registrant held by non-affiliates, based on $37.75 per share (the last
sale price for the common stock on such date as reported on the Nasdaq SmallCap
Market (SM)), was $23,042,298. For purposes of this computation only, all
executive officers, directors and 10% beneficial owners of the registrant are
assumed to be affiliates.
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The number of shares outstanding of each of the registrant's classes of common
stock, as of September 1, 2004, is as follows:
Title of Class Number of Shares Outstanding
- -------------- ----------------------------
Common Stock, 1,411,595
$1 Par Value
DOCUMENT INCORPORATED BY REFERENCE
Certain information from the Proxy Statement of the registrant dated September
27, 2004 has been incorporated by reference in response or partial response to
Part III, Items 10, 11, 12, 13 and 14 in this Report.
PART I
ITEM 1. BUSINESS.
Federal Screw Works (the "Company"), originally incorporated in Michigan
in 1919, is a domestic manufacturer of industrial component parts, consisting of
locknuts, bolts, piston pins, studs, bushings, shafts and other machined, cold
formed, hardened and/or ground metal parts, all of which constitute a single
industry segment.
The Company's products are manufactured at several plants and are
fabricated from metal rod and bar, which are generally available at competitive
prices from multiple sources. Production is in high-volume job lots to the
specification of original equipment manufacturers and sold to them for
incorporation into their assemblies. The majority of these sales are to
manufacturers of automobiles and trucks, with the balance being mainly to
manufacturers of nonautomotive durable goods.
Approximately 93% of the Company's net sales in fiscal 2004 (93% and 91%
in fiscal 2003 and fiscal 2002, respectively) were made either directly or
indirectly to automotive companies. The Company generally does not require
collateral from its customers.
While the Company holds a number of patents, it believes that the
successful continuation of its business is not dependent on any single patent or
group of patents, trademarks, or licenses. The Company retains the rights to
certain royalties related to an exclusive license agreement with semiconductor
manufacturer Silicon Systems incorporated (SSi), whereunder SSi will produce and
market certain phonetic speech synthesizer chips under the SSi product name. The
Company does not consider the royalty agreement to be material to its business.
The OEM supplier industry is highly cyclical and, in large part, dependent
upon the overall strength of consumer demand for light trucks and passenger
cars. There can be no assurance that the automotive industry, for which the
Company supplies components, will not experience downturns in the future. A
decrease in overall consumer demand for motor vehicles in general, or specific
segments, could have a material adverse effect on the Company's financial
condition and results of operations.
The Company is dependent upon sales to the two largest U.S. automobile
manufacturers, a condition that has existed for over fifty years. Although the
Company has purchase orders from such customers, such purchase orders generally
provide for supplying the customer's requirements for a particular model or
model year rather than for manufacturing a specific quantity of products. The
loss of any one of such customers or significant purchase orders could have a
material adverse effect on the Company. These customers are also able to exert
considerable pressure on component suppliers to reduce costs, improve quality
and provide additional design and engineering capabilities. There can be no
assurance that the additional costs of increased quality standards, price
reductions or additional capabilities required by such customers will not have a
material adverse effect on the financial condition or results of operations of
the Company.
Customers comprising 10% or greater of the Company's net sales are
summarized as follows:
2004 2003 2002
---- ---- ----
Ford Motor Company....................................... 33% 34% 35%
TRW Automotive........................................... 15% 14% 11%
General Motors Corporation............................... 12% 12% 13%
All Others............................................... 40% 40% 41%
--- --- ---
100% 100% 100%
=== === ===
Many of the Company's customers, and other suppliers to the Company's
customers, are unionized, and work stoppages, slow-downs or other labor disputes
experienced by, and the labor relations policies of, such customers and
suppliers, could have an adverse effect on the Company's results of operations.
3
As of August 31, 2004, the Company had an estimated backlog of firm orders
amounting to approximately $8,450,000, all of which are expected to be filled
within the 2005 fiscal year. The comparable backlog as of August 31, 2003
amounted to approximately $12,350,000.
The manufacture and sale of the Company's products is an extremely
competitive business. Because industry statistics are not available, the Company
is unable to accurately determine the number of its competitors, nor to state
its competitive position in its principal market as a supplier of parts to
automotive customers. However, the Company believes that it is generally
considered a leading producer of its principal type of product. While the
Company does not believe that there is any single domestic supplier, or small
group of suppliers, which is dominant in its principal markets, the Company is
aware that there are companies making similar products, with greater sales and
resources than the Company. The Company is also aware that in recent years the
activity of foreign competitors manufacturing similar products has increased.
The quality of the product, the product's price and service to customers are the
principal methods of competition. There is no assurance that the Company will be
able to successfully compete in future periods.
Research and development activity expenses during each of the last three
fiscal years is not deemed material.
The Company has experienced no material effects in complying with
government environmental regulations.
The Company presently employs 376 hourly-rated and salaried personnel. The
Company's hourly work forces at the Chelsea and Romulus facilities are
unionized. The Company's contracts with the unions in Chelsea and Romulus expire
in May of 2005 and January of 2007, respectively.
In fiscal years 2002 and 2003, the Company's sales to customers outside
the United States were not significant. In fiscal 2004, the Company's sales
continued to be primarily to customers within the United States; however,
approximately 18% of the Company's sales were to customers in Canada, composed
primarily of sales to TRW Automotive and the Canadian operations of General
Motors Corporation and the Ford Motor Company. Sales to customers outside the
United States and Canada in fiscal 2004 were not significant.
ITEM 2. PROPERTIES.
The Company's industrial component parts are manufactured in seven plants
located throughout Michigan. A brief description of each division follows.
The Big Rapids Division in Big Rapids, Michigan, manufactures special
high-strength bolts and other cold formed products using boltmakers and headers
as primary equipment. Among the items manufactured to both inch and metric
specifications are hex head bolts, connecting rod bolts, studs and flange bolts.
The 200,000 square foot plant is situated on 25 acres of land, and contains heat
treat facilities for hardening in-process parts.
The Romulus Division is housed in a 100,000 square foot plant, on 13 acres
of land, in Romulus, Michigan. This division uses nutformers as primary
equipment to manufacture special prevailing torque locknuts. Products include
locknuts, connecting rod nuts, and other special nut products, in both metric
and inch sizes. The plant has its own furnace for heat treating in-process
parts.
In February of 1999, the Company began operations in a new 35,000 square
foot plant in Traverse City, Michigan. This division manufactures special
assemblies for our automotive customers.
The parts produced at the above divisions are sold principally to the
automotive market. These parts are mass produced, and most are shipped directly
to car assembly plants.
The Novex Tool Division occupies a 19,000 square foot leased facility in
Brighton, Michigan. The lease expires in December, 2004. The division
manufactures perishable tooling, primarily for the cold heading industry.
Approximately thirty percent of its output is consumed by the Company's Big
Rapids, Romulus and Traverse City Divisions.
4
The Chelsea Division is located in Chelsea, Michigan, in a plant having
approximately 86,000 square feet. Primary equipment consists of automatic screw
machines and rotary index machines capable of making products from 1/16 inch to
2-3/4 inches in diameter. The Chelsea Division fabricates a wide variety of
precision parts including piston pins, bushings, fittings, special fasteners,
valve components, sleeves, shafts, gear blanks and the like. These parts are
generally produced in large volume lots and delivered direct to manufacturers of
products such as compressors, automobiles, transmissions and small engines.
In August, 1994, the Company leased a 16,000 square foot facility in
Romulus, Michigan to conduct engineering and manufacturing development
activities. This facility, known as the Technical Center, gives the Company
sufficient room to try out new primary and secondary equipment, tooling, and
parts feeding and automation devices, as well as permitting the Company to
rebuild recently purchased used equipment.
In June of 2001, the Company began operations in a new 43,000 square foot
plant in Boyne City, Michigan. This division manufactures machined products for
the refrigeration and automotive industries.
The Company's corporate offices are located at 20229 Nine Mile Road, St.
Clair Shores, an eastern suburb of Detroit, Michigan. The Company occupies
12,000 square feet of space under a ten year lease expiring in 2009 (renewable
for two additional periods of five years each).
The Company owns outright all of the above described buildings, land and
production facilities except as specifically noted to the contrary. The Company
utilizes all of the floor space of these structures. Present facilities are
adequate to meet the needs of each respective division.
ITEM 3. LEGAL PROCEEDINGS.
Inapplicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Inapplicable.
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY.
The persons listed below are currently executive officers of the Company.
NAME POSITION AGE
---- -------- ---
Thomas ZurSchmiede Chief Executive Officer since 2002; President of the Company since 1994; Vice 53
President - Big Rapids Division, 1988 - 1994; Vice President - Corporate
Development, 1984 - 1988; Director of Corporate Development, 1983 - 1984, all
of the Company.
Robert F. ZurSchmiede Executive Vice President and Chief Operating Officer since 2002; Vice President - 51
Traverse City Division in 1999 and Romulus Division of the Company 1986 to 2002;
Vice President and General Manager of the Romulus Division, 1984 to 1986; Assistant
General Manager of the Romulus Division, 1983 to 1984; Assistant Manufacturing
Manager, Romulus Division, 1982 to 1983, all of the Company.
W.T. ZurSchmiede, Jr. Chairman of the Board, Chief Financial Officer and Secretary since 2002; Chairman of 78
the Board and Chief Executive Officer of the Company, 1978 to 2002; Chief Financial
Officer, Secretary and Treasurer, 1988 to 2002; President and Chief Executive
Officer of the Company, 1970 to 1978.
5
John M. O'Brien Vice President-Sales and Marketing since 1986; Vice President-General Sales Manager, 54
1984 to 1986; General Sales Manager, 1982 to 1984; Sabbatical at Stanford University
Business School, 1981 to 1982; Sales Representative, 1975 to 1981, all of the
Company.
Jeffrey M. Harness Vice President of Boyne City Division (since 2001) and Vice President and General 48
Manager of Chelsea and Brighton Divisions since 1994; Vice President and General
Manager - Chelsea Division, 1992 to 1994; General Manager - Chelsea Division, 1985
to 1992; Sales Manager - Chelsea Division, 1984 to 1985; Sales Representative, 1982
to 1984; Management Trainee, 1981 to 1982; Chelsea Division Junior Buyer, 1980 to
1981, all of the Company.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES.
The Company's common stock is traded on the Nasdaq SmallCap Market(SM)
under the symbol "FSCR."
The following table sets forth the quarterly high and low sales prices as
reported by the Nasdaq Small Cap Market(SM). Quotations reflect inter-dealer
prices, without retail mark-ups, mark-downs or commissions, and may not
necessarily represent actual transactions.
2004 2003
---- ----
High Low High Low
---- --- ---- ---
1st Quarter $ 36.30 $ 33.95 $ 33.24 $ 30.76
2nd Quarter 37.89 29.50 33.60 31.40
3rd Quarter 39.79 36.90 34.24 32.14
4th Quarter 37.95 35.31 38.00 33.75
At September 2, 2004, there were approximately 734 holders of record of
the Company's common stock.
For a discussion of dividends declared by the Company for the two most
recent fiscal years, please see Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Dividends."
The Company does not have any compensation plans under which equity
securities of the Company are authorized for issuance.
6
The following table summarizes the Company's stock repurchases for the
three months ended June 30, 2004:
TOTAL NUMBER OF
SHARES PURCHASED MAXIMUM NUMBER
TOTAL NUMBER OF AS PART OF PUBLICLY OF SHARES THAT MAY
SHARES AVERAGE PRICE PAID ANNOUNCED YET BE PURCHASED
PERIOD PURCHASED (a) PER SHARE PROGRAM UNDER THE PROGRAM
------ ------------- --------- ------- -----------------
April 2004 0 $ 0 0 0
May 2004 0 0 0 0
June 2004 10,000 36.55 10,000 158,930
------ ------ ------ -------
Total 10,000 $36.55 10,000 158,930
====== ====== ====== =======
(a) All shares repurchased during the fourth quarter of fiscal 2004 were
purchased through a publicly announced stock repurchase program. For a
description of the program, see Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources".
7
ITEM 6. SELECTED FINANCIAL DATA.
FIVE YEARS ENDED JUNE 30 2004 2003 2002 2001 2000
OPERATIONS (in thousands)
Net sales $ 90,658 $ 95,378 $ 95,496 $ 105,912 $ 121,811
Earnings before federal income taxes(1) (2) 1,699 4,905 6,571 6,873 14,693
Federal income taxes 450 1,602 2,066 2,230 4,941
Net earnings(1) (2) 1,249 3,303 4,505 4,643 9,752
Depreciation and amortization 6,644 6,548 5,933 5,131 4,913
Capital expenditures 9,032 5,722 7,542 12,405 9,978
Cash dividends declared 1,008 1,392 1,402 2,447 2,467
PER SHARE DATA(3)
Net earnings $ 0.87 $ 2.22 $ 2.89 $ 2.91 $ 6.01
Cash dividends declared 0.70 0.92 0.88 1.50 1.47
Book value 41.92 38.00 40.09 37.29 35.96
Market price range
High 39.79 38.00 32.25 34.40 34.56
Low 29.50 30.76 26.55 25.76 24.96
RETURN DATA
Net earnings on net sales 1.4% 3.5% 4.7% 4.4% 8.0%
Net earnings on stockholders' equity 2.1% 6.0% 7.3% 7.7% 16.7%
FINANCIAL POSITION AT JUNE 30 (IN THOUSANDS)
Total assets $ 106,773 $ 94,461 $ 102,680 $ 99,536 $ 94,220
Working capital (net current assets) 20,837 18,904 20,410 19,861 17,205
Other assets 19,877 12,058 16,007 15,975 15,481
Property, plant and equipment (net) 54,178 51,894 52,729 51,143 43,876
---------- ---------- ---------- ---------- ----------
Total assets less current liabilities 94,892 82,856 89,146 86,979 76,562
Less:
Long-term debt 8,260 5,680 6,340 6,735 -
Deferred employee compensation 4,063 3,208 2,808 2,633 2,076
Deferred federal income taxes 2,487 544 1,868 1,940 2,425
Employee benefits 974 1,035 1,100 1,021 975
Post-retirement benefits 18,925 16,347 14,835 13,344 11,747
Other liabilities 1,015 927 891 850 803
---------- ---------- ---------- ---------- ----------
Stockholders' equity (net assets) $ 59,168 $ 55,115 $ 61,304 $ 60,456 $ 58,536
========== ========== ========== ========== ==========
OTHER
Number of employees 376 422 443 478 474
Approximate number of stockholders 734 737 764 891 377
Average shares outstanding(3) 1,434,888 1,487,942 1,558,479 1,594,109 1,621,775
(1) The year 2002 includes after tax gains of $1,498,000 ($2,180,000 pre-tax)
from the sale of stock acquired in the demutualization of insurance companies.
(2) The year 2004 includes a non-cash curtailment charge of $654,000 after-tax
($991,000 pre-tax).
(3) The average shares outstanding and all the per share amounts have been
adjusted for both the February, 2003, and the December, 2000, five-for-four
stock splits.
8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis provide information which management
believes is relevant to an assessment and understanding of the Company's results
of operations and financial condition. The discussion should be read in
conjunction with the Financial Statements and Notes thereto.
EXECUTIVE OVERVIEW
The Company's products are used in the manufacture of light duty trucks
and passenger cars made principally by the two largest North American automobile
companies. These parts are either shipped directly to automakers or to large
automotive component producers, who then supply automakers with their
components. North American consumer demand for cars and trucks from these two
principal automobile manufacturers therefore largely defines the general market
for the Company's products. In the fiscal year just ended, weaker consumer
demand reduced automotive production schedules in comparison with the year
previous, adversely affecting the Company's sales and earnings. Similarly,
recessionary levels of demand from the Company's refrigeration customers
continue.
Price concessions continue to be a significant feature of the Company's
relationship with both automakers and component producers. Further, precipitous
increases in the price of steel, a major cost component of the Company's
operations, were absorbed this fiscal year. As new steel contracts are
negotiated, the Company expects the financial impact of this increase to grow
although the Company cannot quantify this increase at this time. In general, the
Company has been unable to pass this increase on to its customers.
Within a climate of persistently stagnant consumer demand, sustained
pressure for price concessions, and substantial increases in such major cost
components as steel, health care, energy, and regulation, industry pressure for
the transfer of manufacturing activities to lower cost domestic and overseas
producers will intensify. Generally called outsourcing, this process will
provide the Company with a heightened risk of loss of current business as well
as ample practical opportunities to acquire new business. While all of the
Company's operations will be vulnerable to outsourcing, typically but not
exclusively on its less difficult parts, it has in fact secured various new
parts programs of significant value this past year as a result of outsourcing,
including the Company's first large order from a foreign or transplant component
producer supplying a foreign automobile manufacturer.
RESULTS OF OPERATIONS
The following table sets forth the percent relationship of certain items
to net sales for the periods indicated:
For the Years Ended June 30,
----------------------------
2004 2003 2002
---- ---- ----
Net sales 100.0% 100.0% 100.0%
Gross profit 7.8 11.3 11.2
Selling, general and administrative expenses 5.9 6.1 6.3
Interest .2 .2 .2
Other income .2 .1 2.2
Earnings before federal income taxes 1.9 5.1 6.9
Net earnings 1.4 3.5 4.7
The Company reported net sales of $90.7 million in fiscal 2004, which
represented a 4.9% decrease from fiscal 2003 sales of $95.4 million. Net sales
for fiscal 2003 decreased 0.1% from fiscal 2002 sales of $95.5 million. Net
sales in 2004 decreased as a result of reduced vehicle production by Ford,
General Motors and Chrysler. Net sales in 2003 decreased slightly for the same
reason, although the reduction was less in 2003 than it was in 2004.
Gross profit decreased to $7.1 million in fiscal 2004, a $3.7 million
decrease from fiscal 2003. The decrease is attributable to the decrease in net
sales described above, increased steel prices, and curtailment charges
9
related to the Company's benefit plans. Fiscal 2003 gross profit increased $0.1
million from fiscal 2002. The increase was attributable to improved productivity
and occurred despite pressure from most of the Company's customers for price
reductions. The Company continues to increase productivity through manufacturing
process improvements. These improvements are achieved primarily through the
purchases of new, more efficient, capital equipment which utilize more recent
technologies.
The Company is dependent upon sales to the two largest U.S. automobile
manufacturers, a condition that has existed for over fifty years. Although the
Company has purchase orders from such customers, such purchase orders generally
provide for supplying the customer's requirements for a particular model or
model year rather than for manufacturing a specific quantity of products. The
loss of any one of such customers or significant purchase orders could have a
material adverse effect on the Company. These customers are also able to exert
considerable pressure on component suppliers to reduce costs, improve quality
and provide additional design and engineering capabilities. There can be no
assurance that the additional costs of increased quality standards, price
reductions or additional capabilities required by such customers will not have a
material adverse effect on the financial condition or results of operations of
the Company.
Selling, general and administrative expenses in fiscal 2004 decreased
$422,000 primarily because of a $600,000 reduction in bonus accruals due to the
decrease in earnings, offset by increases in insurance costs, outside director
fees and professional fees, totaling $155,000. The Company expects the outside
director fees to increase next year due to the addition of one director. Also,
the Company expects professional fees to increase due to continued compliance
with new regulations enacted in response to the Sarbanes-Oxley Act of 2002. In
fiscal 2003 and 2002, selling, general and administrative expenses were 6.1% and
6.3% of net sales, respectively. Interest expense decreased in fiscal 2004 and
2003 because of a decrease in short-term interest rates under the Company's
Revolving Credit and Term Loan Agreement.
Included in other income for fiscal 2002 is $2,180,000 which the Company
received as a result of the sale of stock acquired in connection with the
demutualization of insurance companies. The net after-tax gains from these
transactions were $997,000 in the second quarter and $501,000 in the third
quarter of fiscal 2002.
DIVIDENDS
Aggregate cash dividends declared in fiscal 2004 were $0.70 per share,
$0.22 less than that declared in fiscal 2003 and $0.18 less than that declared
in fiscal 2002. The Company declared a 5-for-4 stock split on February 14, 2003,
payable as a stock dividend April 1, 2003. The dividend per share amounts have
been adjusted to retroactively give effect to the stock split. The Board of
Directors, in August 2004, declared a $0.10 per share quarterly cash dividend.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity and capital resources is cash
generated from operating activities and availability under its Revolving Credit
and Term Loan Agreement.
Cash provided by operating activities in fiscal 2004 was $8.6 million
compared to $11.1 million in 2003 and $11.7 million in 2002. The decrease in
2004 is primarily a result of reduced earnings and changes in working capital.
Working capital at June 30, 2004 equaled $20,837,000 as compared to $18,904,000
at June 30, 2003. Accounts receivable increased $1.1 million in 2004. This
increase is due to one large customer extending its payment terms from the 28th
of every month to the 2nd of the following month. This increased accounts
receivable $870,000 at June 30, 2004. Inventories in fiscal 2004 increased $1.2
million, due in part to rising steel costs and increased quantities of raw
material. Because of the volatility in the steel market discussed earlier, the
Company increased its inventory to insure an uninterrupted supply to its
customers. Accounts payable increased, in part, for the same reason. The cash
provided by operating activities in 2003 were comparable to 2002.
Working capital at June 30, 2003 equaled $18,904,000, as compared to
working capital of $20,410,000 at June 30, 2002. The decrease resulted primarily
from a decease in inventories. Inventories were reduced to reflect lower demand
from the Company's automotive customers and the elimination of strike banks
required earlier but no longer necessary with the signing of a new four year
contract with the employees of the Company's Romulus
10
Division effective February 1, 2003. Accounts payable also decreased due to the
reduction in inventories. Accounts receivable decreased in fiscal 2003 as a
result of lower sales in June, 2003 compared to June 2002.
Capital expenditures for fiscal 2004 were $9.0 million, primarily related
to the purchase of equipment and expansion of activities in order to improve
production efficiencies and enable the Company to meet increased future demand
for its products. Capital expenditures made for these same purposes in fiscal
years 2003 and 2002 were $5.7 million and $7.5 million, respectively.
Expenditures for additional equipment during fiscal 2005 are presently expected
to approximate $6.6 million, of which $1.4 million had been committed at June
30, 2004. These future capital expenditures are expected to be financed from
cash generated from operations and additional borrowing capacity under the
Revolving Credit and Term Loan Agreement.
Net cash provided by financing activities was $0.2 million in fiscal 2004.
This compares to $5.1 million used in financing activities in fiscal 2003 and
$4.1 million used in financing activities in fiscal 2002. Fluctuations in these
activities have been influenced principally by borrowings and repayments under
the Company's Revolving Credit and Term Loan Agreement. Repurchases of the
Company's common stock have fluctuated due to the availability of stock to
purchase. Dividends paid decreased in fiscal 2004 and fiscal 2003 compared to
the previous years as a result of reduced earnings.
On December 3, 2003, the Board of Directors authorized the Company to
repurchase up to 185,000 shares, or approximately 12.9%, of the Company's then
outstanding common stock. Under the repurchase program, the Company has the
authority to repurchase stock through the open market, block purchases, or in
negotiated private transactions on an ongoing basis. The repurchases are subject
to the availability of stock, general market conditions, the trading price of
the stock, alternative uses for capital, and the Company's financial
performance. The Board of Directors believes that the repurchase program will
allow the Company to be in technical compliance with the Controlled Company
exemption from certain new director independence and board committee
requirements for companies traded on the Nasdaq Stock Market, Inc. The purchases
are expected to be financed from cash generated from operations and additional
borrowing capacity under the Revolving Credit and Term Loan Agreement. For
information regarding shares purchased under this repurchase program, see Item
5. "Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities".
On October 17, 2003, the Company extended its Revolving Credit and Term
Loan Agreement by one year. The expiration date for this agreement is now
October 31, 2006, and is renewable annually for an additional year. Borrowings
up to $25 million and capital expenditures of $16 million annually are permitted
under the agreement. The Company has the option to convert borrowings under the
facility to a term note through October 31, 2006. Payments under the term note,
if the conversion option were exercised, would be made quarterly and could
extend to October 31, 2008. Therefore, borrowings under the Revolving Credit and
Term Loan Agreement, which were $8,260,000 at June 30, 2004, $5,680,000 at June
30, 2003 and $6,340,000 at June 30, 2002, are classified as long-term debt. The
increase is the result of increased capital expenditures in fiscal 2004.
Statement of Financial Accounting Standards No. 87 requires recognition of
a minimum liability for those pension plans with accumulated benefit obligations
in excess of the fair values of plan assets at the Company's measurement date of
March 31. Accordingly, in the fourth quarter of fiscal 2003, the Company
recorded a non-cash charge to shareholders' equity of $5,080,000, after-tax,
related to the additional minimum liability for certain underfunded pension
plans which decreased shareholders' equity. Pension funding requirements were
not affected by the recording of this charge. Further, the charge did not impact
net earnings, and was reversed in fiscal 2004 as a result of the fair value of
pension plan assets exceeding the accumulated benefit obligations at March 31,
2004.
MARKET RISK
The Company's market risk is limited to interest rate risk on its
Revolving Credit and Term Loan Agreement. At June 30, 2004, the carrying amounts
reported in the balance sheet for cash, accounts receivable, accounts payable,
debt and investments approximate fair value. Accordingly, management believes
this risk is not material. Borrowings under the Revolving Credit and Term Loan
Agreement are subject to variable interest rates. A one hundred basis point
increase in interest rates would have resulted in additional interest expense of
$58,000 for the year ended June 30, 2004.
11
IMPACT OF INFLATION AND CHANGING PRICES
The Company passes increased costs on to customers, to the extent
permitted by competition, by increasing sales prices whenever possible. In
fiscal 2004, 2003 and 2002, the Company was unable, with a few exceptions, to
pass on cost increases incurred due to competitive pressures. Sales price
increases in each of these years were insignificant.
CRITICAL ACCOUNTING POLICIES
The accompanying financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America.
Application of these accounting principles requires the Company's management to
make estimates about the future resolution of existing uncertainties. As a
result, actual results could differ from these estimates. In preparing these
financial statements, management has made its best estimates and judgments of
the amounts and disclosures included in the financial statements, giving due
regard to materiality. The Company bases its estimates on historical experience
and on various assumptions that are believed to be reasonable under the
circumstances. On an on-going basis, the Company evaluates its estimates and
underlying assumptions. In the event estimates or underlying assumptions prove
to be different from actual amounts, adjustments are made in the subsequent
period to reflect more current information. The Company believes that the
following significant accounting policies involve management's most difficult,
subjective judgments or involve the greatest uncertainty.
Investments and Marketable Securities
The Company accounts for its investments under FASB 115 as securities
available-for-sale. Available-for-sale securities are carried at fair value,
with unrealized gains and losses, net of tax, reported as a separate component
of stockholders' equity. Realized gains and losses and declines in value judged
to be other than temporary on available-for-sale securities are included in
investment income or loss. The cost of securities sold is based on the specific
identification method. Interest and dividends on securities classified as
available-for-sale are included in investment income. The fair value of
marketable securities is based on quoted market value. The Company reviews its
investments to determine if the value shows a decline that has been deemed other
than temporary. The use of different judgments could negatively affect the
Company's results of operations for the period. For the years ended June 30,
2004 and 2003, Federal Screw Works recorded losses of $8,000 and $88,000,
respectively, on equity investments as a result of declines in the fair market
value of certain of its equity investments deemed to be other-than-temporary.
Revenue Recognition
The Company recognizes revenue from product sales when goods are shipped
and title has transferred to the customer. An estimated reserve is recorded for
anticipated returns and credit memos which will be issued on sales recognized to
date. The use of different estimates could negatively affect the Company's
results of operations. The Company has several product lines, but only one
reportable segment. Providing revenues from each product line or each group of
product lines is impracticable. The SEC's Staff Accounting Bulletin ("SAB") No.
101, "Revenue Recognition," provides guidance on the application of accounting
principles generally accepted in the United States of America to selected
revenue recognition issues. The Company has concluded its revenue recognition
policy is appropriate and in accordance with accounting principles generally
accepted in the United States of America and SAB No. 101.
Allowance for Uncollectible Accounts Receivable
Accounts receivable have been reduced by an allowance for amounts that may
become uncollectible in the future. This estimated allowance is based primarily
on management's evaluation of the financial condition of the customer and
historical experience. Also, the Company monitors its accounts receivable and
charges to expense an amount equal to its estimate of potential credit losses.
The Company considers a number of factors in determining its estimates,
including the length of time its trade accounts receivable are past due, the
Company's previous loss history, the customer's current ability to pay its
obligation and the condition of the general economy and the industry as a whole.
The use of different estimates could negatively affect the Company's results of
operation for the period.
12
Price Reductions
As of June 30, 2004 and 2003, all customer price reductions have been
accounted for, therefore no amounts have been accrued.
Inventories
Inventories are stated at the lower of cost or market. Cost, determined by
the last-in, first-out (LIFO) method, was used for certain raw material
inventories; $1,546,000 and $785,000 at June 30, 2004 and 2003, respectively.
The remaining inventories are costed using the first-in, first-out (FIFO)
method. If inventories valued on LIFO had been valued at current cost, amounts
reported at June 30 would have been increased by $994,000 and $499,000 in fiscal
2004 and 2003, respectively. Provision is made to reduce inventories to net
realizable value for excess and/or obsolete material. The Company periodically
reviews its inventory levels in order to identify obsolete and slow-moving
inventory. The Company estimates excess or obsolete inventory based principally
upon contemplated future customer demand for the Company's products. The use of
different assumptions in determining slow-moving and obsolete inventories would
result in different charges to cost of sales in each period presented and could
negatively affect the Company's results of operations.
Workers' Compensation Reserve
The Company is self-insured for workers' compensation claims for up to
$350,000 per claim. The Company has excess liability insurance with an outside
insurance carrier to minimize its risks to catastrophic claims. Losses are
accrued based on an estimate of the ultimate aggregate liability for claims
incurred, using certain assumptions based on the Company's experience under this
program. Factors considered in estimating our reserves are the nature of
outstanding claims, estimated costs to settle existing claims and loss history.
Significant changes in the factors described above could have a material adverse
impact on future operating results. At June 30, 2004 and 2003, the Company has
accrued approximately $727,000 and $809,000, respectively, included in payroll
and employee benefits. Workers' compensation expense was $327,000 in fiscal
2004. This compares to $140,000 in fiscal 2003 and $387,000 in fiscal 2002. The
expense will vary year to year, depending on the number and severity of injuries
incurred.
FORWARD LOOKING STATEMENTS
Certain information in the foregoing "Management's Discussion and Analysis
of Financial Condition and Results of Operations" contains "forwarding looking
statements" within the meaning of the Securities Act of 1933 and the Securities
Exchange Act of 1934, both as amended, with respect to expectations for future
periods, which are subject to various uncertainties which could cause actual
results to differ materially from those in the forward looking statements. These
uncertainties include, but are not limited to:
- increased costs for steel used to manufacture the Company's
products;
- diversion of business from our customers to overseas
manufacturers;
- increased costs incurred due to recently enacted and proposed
changes in securities laws and regulations, as well as
recently enacted rules of the Nasdaq Stock Market;
- increased health care, energy and other costs;
- increased competition;
- inability of the Company to expand its range of technical
capabilities through the production of more sophisticated,
complex parts, yielding higher, more durable margins;
- the loss of, or reduction in business with, the Company's
principal customers;
13
- fluctuations in demand for the Company's products;
- the impact of additional costs of increased quality standards,
price reductions or additional capabilities required by the
Company's principal customers;
- the ability of the Company to pass cost increases on to its
customers;
- changes in expected capital expenditures;
- work stoppages, strikes and slowdowns at the Company's
facilities and those of its customers; and
- adverse changes in economic conditions generally and those of
the automotive industry, specifically.
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have off-balance sheet arrangements, financings or
other relationships with unconsolidated entities known as "special purpose
entities" (SPEs). In the ordinary course of business, the Company leases certain
real properties and equipment as disclosed in Note 4 to the financial
statements.
CONTRACTUAL OBLIGATIONS
The following table summarizes the Company's contractual obligations as of
June 30, 2004:
Payment Due by Period
---------------------
(Dollars in thousands) Less Than 1 - 3 3 - 5 More Than
Contractual Obligations Total 1 Year Years Years 5 Years
- ----------------------- --------- --------- -------- -------- ---------
Long-Term Debt $ 8,260 $ - $ 8,260 $ - $ -
Operating Lease Obligations 3,103 888 1,627 588 -
Purchase Obligations 1,457 826 631 - -
--------- --------- -------- -------- ---------
Total $ 12,820 $ 1,714 $ 10,518 $ 588 $ -
========= ========= ======== ======== =========
The Purchase Obligations are the Company's contractual agreement to
purchase specific quantities of natural gas at a fixed price.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's market risk is limited to interest rate risk on its
Revolving Credit and Term Loan Agreement. At June 30, 2004, the carrying amounts
reported in the balance sheet for cash, accounts receivable, accounts payable,
debt and investments approximate fair value. Accordingly, management believes
this risk is not material. Borrowings under the Revolving Credit and Term Loan
Agreement are subject to variable interest rates. A one hundred basis point
increase in the interest rates would result in additional interest expense of
$58,000 for the fiscal year ended June 30, 2004.
14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
STATEMENTS OF INCOME
FEDERAL SCREW WORKS
YEAR ENDED JUNE 30,
-------------------
2004 2003 2002
---- ---- ----
Net sales $ 90,658,205 $ 95,378,392 $ 95,496,398
------------ ------------ ------------
Costs and expenses:
Cost of products sold 83,589,330 84,554,748 84,834,236
Selling, general and administrative 5,395,392 5,817,075 5,970,997
Interest 165,292 210,821 235,885
Other income (190,987) (109,129) (2,116,115)
------------ ------------ ------------
88,959,027 90,473,515 88,925,003
------------ ------------ ------------
EARNINGS BEFORE FEDERAL INCOME TAXES 1,699,178 4,904,877 6,571,395
Federal income taxes - Note 5:
Current 1,081,612 854,313 2,210,236
Deferred (credit) (631,612) 747,687 (144,236)
------------ ------------ ------------
450,000 1,602,000 2,066,000
------------ ------------ ------------
NET EARNINGS $ 1,249,178 $ 3,302,877 $ 4,505,395
============ ============ ============
Average number of common shares outstanding 1,434,888 1,487,942 1,558,479
============ ============ ============
Net earnings per common share $ 0.87 $ 2.22 $ 2.89
============ ============ ============
See accompanying notes.
15
BALANCE SHEETS
FEDERAL SCREW WORKS
JUNE 30
2004 2003
---- ----
ASSETS
CURRENT ASSETS
Cash $ 157,068 $ 415,797
Accounts receivable, net 15,243,333 14,095,869
Inventories - Note 1:
Finished products 4,623,653 6,619,098
In-process products 9,027,018 6,777,341
Raw materials and supplies 2,076,394 1,175,460
------------- -------------
Total inventories 15,727,065 14,571,899
Prepaid expenses and other 841,143 566,626
Deferred federal income taxes - Note 5 750,000 858,727
------------- -------------
TOTAL CURRENT ASSETS 32,718,609 30,508,918
------------- -------------
OTHER ASSETS
Cash value of life insurance 5,951,122 5,824,908
Intangible asset - Note 6 397,500 1,701,520
Prepaid pension costs - Note 6 8,990,117 831,827
Investments and other 4,538,561 3,700,189
------------- -------------
19,877,300 12,058,444
------------- -------------
PROPERTY, PLANT AND EQUIPMENT - NOTES 3 AND 4
Land 552,150 552,150
Buildings and improvements 14,516,604 14,183,780
Machinery and equipment 114,361,566 107,333,492
------------- -------------
129,430,320 122,069,422
Less accumulated depreciation (75,252,737) (70,175,675)
------------- -------------
54,177,583 51,893,747
------------- -------------
$ 106,773,492 $ 94,461,109
============= =============
16
BALANCE SHEETS (CONTINUED)
FEDERAL SCREW WORKS
JUNE 30
2004 2003
---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 5,782,224 $ 4,317,841
Payroll and employee benefits 4,086,714 5,447,283
Dividends payable 142,160 145,547
Federal income taxes 246,740 -
Taxes, other than income taxes 1,562,765 1,599,726
Other accrued liabilities 61,016 94,455
------------ -----------
TOTAL CURRENT LIABILITIES 11,881,619 11,604,852
------------ -----------
LONG-TERM LIABILITIES
Long-term debt - Note 3 8,260,000 5,680,000
Deferred employee compensation - Note 6 4,063,182 3,208,393
Deferred federal income taxes - Note 5 2,487,000 543,909
Employee benefits 973,966 1,035,452
Postretirement benefits - Note 6 18,924,710 16,346,603
Other liabilities 1,014,632 927,242
------------ -----------
35,723,490 27,741,599
------------ -----------
STOCKHOLDERS' EQUITY - Notes 2, 9 and 10
Common stock, $1 par value: authorized 2,000,000 shares;
1,411,595 shares outstanding in 2004 (1,450,465 in 2003) 1,411,595 1,450,465
Additional capital 3,269,476 3,269,476
Retained earnings 54,393,356 55,515,392
Accumulated other comprehensive income (loss) 93,956 (5,120,675)
------------ -----------
59,168,383 55,114,658
------------ -----------
$106,773,492 $94,461,109
============ ===========
See accompanying notes.
17
STATEMENTS OF STOCKHOLDERS' EQUITY
FEDERAL SCREW WORKS
YEARS ENDED JUNE 30, 2004, 2003 AND 2002
ACCUMULATED
OTHER TOTAL
COMMON ADDITIONAL RETAINED COMPREHENSIVE STOCKHOLDERS'
STOCK CAPITAL EARNINGS INCOME (LOSS) EQUITY
----------- ---------- ----------- ------------- --------------
BALANCES AT JULY 1, 2001 $ 1,296,887 $3,269,476 $56,001,953 $ (112,614) $ 60,455,702
Net earnings for the year 4,505,395 4,505,395
Change in unrealized loss on
securities available-for-sale,
net of $5,000 tax effect 10,555 10,555
--------------
Total comprehensive income 4,515,950
Purchase of 62,794 shares (62,794) (2,201,970) (2,264,764)
Cash dividends declared -
$0.88 per share (1,402,464) (1,402,464)
----------- ---------- ----------- ------------- --------------
BALANCES AT JUNE 30, 2002 1,234,093 3,269,476 56,902,914 (102,059) 61,304,424
Net earnings for the year 3,302,877 3,302,877
Change in unrealized loss on
securities available -for-sale,
net of $32,000 tax effect 61,615 61,615
Minimum pension liability, net of
$2,502,203 tax effect (5,080,231) (5,080,231)
--------------
Total comprehensive loss (1,715,739)
Purchase of 78,600 shares (78,600) (3,003,440) (3,082,040)
Effect of stock split 294,972 (294,972) -
Cash dividends declared -
$0.92 per share (1,391,987) (1,391,987)
----------- ---------- ----------- ------------- --------------
BALANCES AT JUNE 30, 2003 1,450,465 3,269,476 55,515,392 (5,120,675) 55,114,658
Net earnings for the year 1,249,178 1,249,178
Change in unrealized loss on
securities available -for-sale,
net of $69,000 tax effect 134,400 134,400
Change in minimum pension
liability, net of $2,502,203
tax effect 5,080,231 5,080,231
--------------
Total comprehensive income 6,463,809
Purchase of 38,870 shares (38,870) (1,363,042) (1,401,912)
Cash dividends declared -
$0.70 per share (1,008,172) (1,008,172)
----------- ---------- ----------- ------------- --------------
BALANCES AT JUNE 30, 2004 $ 1,411,595 $3,269,476 $54,393,356 $ 93,956 $ 59,168,383
=========== ========== =========== ============= ==============
( ) Denotes deduction.
See accompanying notes.
18
STATEMENTS OF CASH FLOWS
FEDERAL SCREW WORKS
YEAR ENDED JUNE 30,
2004 2003 2002
---- ---- ----
OPERATING ACTIVITIES
Net earnings $ 1,249,178 $ 3,302,877 $ 4,505,395
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization 6,643,831 6,548,170 5,933,491
Increase in cash value of life insurance (126,214) (128,825) (130,278)
Change in deferred federal income taxes (631,612) (1,366,649) (142,671)
Employee and postretirement benefits 2,516,621 1,447,420 1,569,226
Loss on sale of equipment 63,834 8,599 17,797
Deferred retirement benefits and other 1,147,598 (504,973) 325,509
Changes in operating assets and liabilities:
Accounts receivable (1,147,464) 873,981 (1,144,164)
Inventories, prepaid expenses and other (1,429,683) 2,822,278 (211,788)
Accounts payable and accrued expenses 276,767 (1,929,708) 977,802
----------- ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 8,562,856 11,073,170 11,700,319
----------- ------------ ------------
INVESTING ACTIVITIES
Purchases of property, plant and equipment (9,032,475) (5,721,886) (7,541,710)
Proceeds from sale of equipment 40,974 - 4,600
----------- ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (8,991,501) (5,721,886) (7,537,110)
----------- ------------ ------------
FINANCING ACTIVITIES
Additional borrowings (principal repayments)
under bank credit agreement, net 2,580,000 (660,000) (395,000)
Purchases of common stock (1,401,912) (3,082,040) (2,264,764)
Dividends paid (1,008,172) (1,391,987) (1,402,464)
----------- ------------ ------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 169,916 (5,134,027) (4,062,228)
----------- ------------ ------------
INCREASE (DECREASE) IN CASH (258,729) 217,257 100,981
Cash at beginning of year 415,797 198,540 97,559
----------- ------------ ------------
CASH AT END OF YEAR $ 157,068 $ 415,797 $ 198,540
=========== ============ ============
See accompanying notes.
19
NOTES TO FINANCIAL STATEMENTS
FEDERAL SCREW WORKS
DESCRIPTION OF BUSINESS: Federal Screw Works was founded in 1917 and is a
domestic manufacturer of industrial component parts, consisting of locknuts,
bolts, piston pins, studs, bushings, shafts and other machined and/or ground
metal parts, all of which constitute a single business segment. The Company's
fiscal year end is June 30.
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
INVENTORIES: Inventories are stated at the lower of cost or market. Cost,
determined by the last-in, first-out (LIFO) method, was used for certain raw
material inventories, $1,546,000 and $785,000 at June 30, 2004 and 2003,
respectively. The remaining inventories are costed using the first-in, first-out
(FIFO) method. If inventories valued on LIFO had been valued at current cost,
amounts reported at June 30 would have been increased by $994,000 and $499,000
in 2004 and 2003, respectively.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment is stated at cost,
which includes the cost of interest which is capitalized during construction of
significant additions. Provisions for depreciation are based upon the estimated
useful lives of the respective assets and are computed by the straight-line
method for financial reporting purposes and by accelerated methods for income
tax purposes.
INVESTMENTS: In accordance with Statement of Financial Accounting Standards No.
115 ("FASB 115"), the Company has classified all investments as "available for
sale" because they are freely tradable. Available-for-sale securities are
carried at fair value, with unrealized gains and losses reported as a separate
component of stockholders' equity net of applicable income taxes. Realized gains
and losses and declines in value deemed to be other-than-temporary on
available-for-sale securities are included in other income. The cost basis for
realized gains and losses on available-for-sale securities is determined on a
specific identification basis.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements. Actual results could differ from those
estimates.
REVENUE RECOGNITION: The Company recognizes revenue from product sales when
goods are shipped and title has transferred to the customer. For one of its
customers, product is shipped to the customer's warehouse and title transfers
and revenue is recognized when this customer consumes the goods from its
warehouse and notifies us. The annual revenue from this customer represents 1.5%
of total sales. An estimated reserve is recorded for anticipated returns and
credit memos which will be issued on sales recognized to date. The use of
different estimates could negatively affect the Company's results of operations.
The Company has several product lines, but only one reportable segment.
Providing revenues from each product line or each group of product lines is
impracticable. The SEC's Staff Accounting Bulletin ("SAB") No. 101, "Revenue
Recognition," provides guidance on the application of accounting principles
generally accepted in the United States of America to selected revenue
recognition issues. The Company has concluded its revenue recognition policy is
appropriate and in accordance with accounting principles generally accepted in
the United States of America and SAB No. 101.
ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS RECEIVABLE: Accounts receivable have been
reduced by an allowance for amounts that may become uncollectible in the future.
This estimated allowance ($50,000 at June 30, 2004 and 2003) is based primarily
on management's evaluation of the financial condition of the customer and
historical experience. Also, the Company monitors its accounts receivable and
charges to expense an amount equal to its estimate of potential credit losses.
The Company considers a number of factors in determining its estimates,
including the length of time its trade accounts receivable are past due, the
Company's previous loss history, the customer's current ability to pay its
obligation and the condition of the general economy and the industry as a whole.
The use of different estimates could negatively affect the Company's results of
operations for the period.
OTHER INCOME: Included in other income for the year ended June 30, 2002 is a
gain of $2,180,000 resulting from the sale of stock acquired in connection with
the demutualization of insurance companies.
FAIR VALUE OF FINANCIAL INSTRUMENTS: At June 30, 2004 and 2003, the carrying
amounts reported in the balance sheets for cash, accounts receivable, accounts
payable, debt and investments approximate fair value.
20
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FEDERAL SCREW WORKS
NET EARNINGS PER COMMON SHARE: Net earnings per common share is based on the
weighted average number of common shares outstanding of 1,434,888 in 2004,
1,487,942 in 2003 and 1,558,479 in 2002.
NOTE 2 - INVESTMENTS
The Company has invested approximately $4,390,000 and $3,532,000 as of June 30,
2004 and 2003, respectively, which has been designated for payment of certain
liabilities related to deferred compensation plans. These amounts were recorded
in investments and other assets within the balance sheets. The fair value of
approximately $2,465,000, $1,271,000 and $654,000 of the Company's investments
were held in equity securities, debt securities and short-term investments,
respectively, as of June 30, 2004. Approximately $1,380,000, $1,086,000 and
$1,066,000 of the Company's investments were held in equity securities, debt
securities, and short-term investments, respectively, as of June 30, 2003. Debt
securities are scheduled to mature beginning in December 2005 and ending in
August 2013.
For the years ended June 30, 2004 and 2003, the Company recorded unrealized
gains of $134,000 (net of $69,000 tax effect) and $62,000 (net of $32,000 tax
effect), respectively, from its equity investments, which is reflected in the
shareholders' equity section of the balance sheets in accordance with FASB 115.
The balance of the unrealized gain (loss) at June 30, 2004 and 2003 was $94,000
and ($40,000), respectively.
Management continually evaluates whether changes in the value of such
investments should be considered to be other-than-temporary. For the years ended
June 30, 2004 and 2003, Federal Screw Works recorded losses of $8,000 and
$88,000, respectively, on equity investments as a result of declines in the fair
market value of certain of its equity investments deemed to be
other-than-temporary.
NOTE 3 - DEBT
Long-term debt at June 30 consists of the following:
2004 2003
---- ----
Revolving credit note payable to bank $8,260,000 $5,680,000
Less current maturities - -
---------- ----------
$8,260,000 $5,680,000
========== ==========
The Company has a $25,000,000 revolving credit and term loan agreement with a
bank. The Company has the option to convert borrowings thereunder (classified as
long-term debt) to a term note through October 31, 2006, the expiration date of
the agreement. Payments under the term note, if the conversion option is
exercised, would be made quarterly commencing three months following conversion
until maturity of the term note on October 31, 2008. Interest (2.5625% at June
30, 2004) on outstanding borrowings is determined based on the prime rate, or at
the Company's option, an alternative variable market rate. The Company also pays
a commitment fee of 3/8% on the unused portion of the revolving credit.
The Company is in compliance with covenants of the revolving credit and term
loan agreement including the requirements to meet certain financial ratios.
Interest paid by the Company during fiscal 2004, fiscal 2003 and fiscal 2002
aggregated $200,000, $245,000 and $353,000, respectively. Interest capitalized
into property, plant and equipment in fiscal 2004 and fiscal 2003 was $113,000
and $73,000, respectively.
21
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FEDERAL SCREW WORKS
NOTE 4 - LEASES AND OTHER COMMITMENTS
At June 30, 2004, future minimum lease payments for various non-cancelable
operating leases with initial terms of one year or more are as follows:
YEAR ENDING JUNE 30
- -------------------
2005 $ 888,000
2006 649,000
2007 528,000
2008 450,000
2009 405,000
Thereafter 183,000
----------
Total minimum lease payments $3,103,000
==========
Total rent expense was $1,146,000 in fiscal 2004, $1,181,000 in fiscal 2003 and
$1,190,000 in fiscal 2002.
Costs committed to complete the expansion of existing plant facilities and the
purchase of machinery and equipment approximated $1,370,000 at June 30, 2004.
NOTE 5 - INCOME TAXES
A reconciliation of the federal income tax provision to the amount computed by
applying the applicable statutory federal income tax rate (34% in 2004, 2003 and
2002) to earnings before federal income taxes follows:
2004 2003 2002
-------- ---------- ----------
Computed amount $578,000 $1,668,000 $2,233,000
Life insurance policies (68,000) (73,000) (78,000)
Other 60,000 7,000 (89,000)
-------- ---------- ----------
Total federal income tax provision $450,000 $1,602,000 $2,066,000
======== ========== ==========
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets as of June 30, 2004 and 2003
are as follows:
22
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FEDERAL SCREW WORKS
2004 2003
---------- ----------
Deferred tax liabilities:
Accelerated tax depreciation $7,864,000 $7,241,000
Other 143,000 112,000
---------- ----------
Total deferred tax liabilities 8,007,000 7,353,000
---------- ----------
Deferred tax assets:
Employee benefits 5,953,000 4,766,000
Minimum pension liability - 2,502,000
Inventories 317,000 400,000
---------- ----------
Total deferred tax assets 6,270,000 7,668,000
---------- ----------
Net deferred tax (assets) liabilities $1,737,000 $ (315,000)
========== ==========
Federal income taxes paid by the Company during 2004, 2003 and 2002 totaled
$717,000, $985,000 and $1,755,000, respectively. State income taxes paid during
2004, 2003 and 2002 are not material.
NOTE 6 - EMPLOYEE BENEFIT PLANS
The Company sponsors three defined benefit pension plans covering substantially
all employees. Benefits under two of the plans are based on negotiated rates
times years of service. Under the remaining plan, benefits are based on
compensation during the years immediately preceding retirement and years of
service. It is the Company's policy to make contributions to these plans
sufficient to meet minimum funding requirements of the applicable laws and
regulations, plus such additional amounts, if any, as the Company's actuarial
consultants advise to be appropriate.
In addition to providing pension benefits, the Company provides certain health
care and life insurance benefits for retired employees. Substantially all of the
Company's employees may become eligible for those benefits if they reach normal
retirement age while working for the Company. The benefits are provided through
certain insurance companies.
The Company uses a measurement date of March 31 and June 30 for purposes of
valuing its obligations related to pension benefits and postretirement benefits,
respectively. The following tables set forth the plans' funded status at the
2004 and 2003 measurement dates:
23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FEDERAL SCREW WORKS
CHANGES IN BENEFIT OBLIGATION ARE:
PENSION POSTRETIREMENT
BENEFITS BENEFITS
---------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Benefit obligation at beginning of year $ 29,853,000 $ 26,125,000 $ 26,786,000 $ 21,805,000
Service cost 830,000 745,000 710,000 482,000
Interest cost 1,890,000 1,844,000 1,567,000 1,475,000
Plan amendments - 53,000 - (430,000)
Actuarial loss (gain) 2,242,000 2,816,000 (2,639,000) 4,688,000
Benefits paid (1,311,000) (1,757,000) (1,350,000) (1,234,000)
Curtailments 133,000 11,000 - -
Special termination benefits 4,000 16,000 - -
------------ ------------ ------------ ------------
Benefit obligation at end of year $ 33,641,000 $ 29,853,000 $ 25,074,000 $ 26,786,000
============ ============ ============ ============
CHANGES IN PLAN ASSETS ARE:
PENSION POSTRETIREMENT
BENEFITS BENEFITS
---------------------------- --------------
2004 2003 2004 2003
------------ ------------ ---- ----
Fair value of plan assets
at beginning of year $ 25,194,000 $ 26,507,000 $ - $ -
Actual return on assets 3,890,000 (913,000) - -
Employer contributions 3,452,000 1,357,000 - -
Benefits paid (1,311,000) (1,757,000) - -
------------ ------------ ---- ----
Fair value of plan assets at end of year $ 31,225,000 $ 25,194,000 $ - $ -
============ ============ ==== ====
24
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FEDERAL SCREW WORKS
FUNDED STATUS OF THE PLANS ARE:
PENSION POSTRETIREMENT
BENEFITS BENEFITS
---------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Funded status at measurement date
(underfunded) $ (2,416,000) $ (4,659,000) $(25,074,000) $(26,786,000)
Unrecognized transition (asset)/obligation - (119,000) 6,887,000 8,554,000
Unrecognized prior service cost 1,203,000 1,471,000 - -
Unrecognized net (gain)/loss 10,203,000 10,340,000 (599,000) 2,040,000
Employer contributions paid between
measurement date and fiscal year-end - 2,853,000 - -
------------ ------------ ------------ ------------
Prepaid/(accrued) benefit cost $ 8,990,000 $ 9,886,000 $(18,786,000) $(16,192,000)
============ ============ ============ ============
AMOUNTS RECOGNIZED IN THE BALANCE SHEETS:
PENSION POSTRETIREMENT
BENEFITS BENEFITS
----------------------- ----------------------------
2004 2003 2004 2003
---------- ---------- ------------ ------------
Pension asset $8,990,000 $ 832,000 $ - $ -
Accrued benefit cost - - (18,786,000) (16,192,000)
Intangible asset - 1,472,000 - -
Accumulated other comprehensive loss
(net of tax) - 5,080,000 - -
Deferred federal income taxes - 2,502,000 - -
---------- ---------- ------------ ------------
Net amount recognized $8,990,000 $9,886,000 $(18,786,000) $(16,192,000)
========== ========== ============ ============
The Company recorded an additional minimum pension liability of $9,054,000 as of
June 30, 2003 representing the amount required to bring the Company's recorded
pension liability to equal the excess of the accumulated benefit obligation over
fair value of plan assets for the applicable plans. An intangible pension asset
of $1,472,000 was recorded as of June 30, 2003 to the extent of the plans'
unrecognized prior service cost. The difference between the additional minimum
pension liability and intangible pension asset was included as other
comprehensive loss of $5,080,000, less income tax benefit of $2,502,000, for the
year ended June 30, 2003. In fiscal 2004, this additional minimum pension
liability was reversed as a result of the fair value of the pension plans'
assets exceeding their accumulated benefit obligations at March 31, 2004.
Assumed health care cost inflation is based on an initial rate of 11.0%
decreasing to an ultimate rate of 5.5% in 2014. Increasing the assumed health
care cost trend rates by one percentage point in each year would increase the
accumulated postretirement benefit obligation as of June 30, 2004 and 2003 by
$2,870,000 and $2,888,000, respectively, and the aggregate of the service and
interest cost components of net periodic postretirement benefit cost for the
years ended June 30, 2004, 2003 and 2002 by $324,000, $247,000, and $256,000,
respectively.
25
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FEDERAL SCREW WORKS
THE COMPONENTS OF NET PERIODIC BENEFIT COST ARE AS FOLLOWS:
PENSION POSTRETIREMENT
BENEFITS BENEFITS
----------------------------------------- --------------------------------------
2004 2003 2002 2004 2003 2002
----------- ----------- ----------- ---------- ----------- ----------
Service cost $ 830,000 $ 745,000 $ 749,000 $ 710,000 $ 482,000 $ 490,000
Interest cost 1,890,000 1,844,000 1,773,000 1,567,000 1,475,000 1,543,000
Expected return
on assets (2,134,000) (2,104,000) (2,043,000) - - -
Amortization of
transition obligation
(asset) (119,000) (114,000) 166,000 855,000 898,000 898,000
Amortization of prior
service cost 225,000 242,000 197,000 - - -
Amortization of
unrecognized net (gain)
loss 624,000 185,000 132,000 - (94,000) -
----------- ----------- ----------- ---------- ----------- ----------
Net periodic benefit cost $ 1,316,000 $ 798,000 $ 974,000 $3,132,000 $ 2,761,000 $2,931,000
=========== =========== =========== ========== =========== ==========
In fiscal 2004, the Company recognized a curtailment loss of $812,000 on its
postretirement health plan and $179,000 for one of its defined benefit pension
plans. The curtailment was a result of a reduction in the number of the
Company's employees.
The Company sponsors a supplemental executive retirement plan which covers
certain executives of the Company. The net periodic benefit cost for the plan
was $687,000, $722,000 and $807,000 in fiscal 2004, 2003 and 2002, respectively.
The Company recorded an additional minimum pension liability of $397,500 as of
June 30, 2004 for this plan representing the excess of the plan's accumulated
benefit obligation over the related benefit cost accrued at June 30, 2004. This
additional minimum pension liability was recorded as an intangible pension
asset. The actuarial present value of vested benefit obligations approximated
$3,815,000 at June 30, 2004 and $3,009,000 at June 30, 2003, respectively. The
Company has invested $3,630,000 and $2,898,000 as of June 30, 2004 and 2003,
respectively, to cover obligations of the plan.
The Company sponsors a retirement plan for directors who are not employees of
the Company. The net periodic benefit cost for the plan was $105,000 in fiscal
2004, $36,000 in fiscal 2003, and $41,000 in fiscal 2002. The actuarial present
value of vested benefit obligations approximated $894,000 at June 30, 2004 and
$879,000 at June 30, 2003. The Company has invested $760,000 and $657,000 as of
June 30, 2004 and 2003, respectively, to cover obligations of the plan.
26
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FEDERAL SCREW WORKS
The following summarizes target asset allocations as of June 30, 2004 and major
asset categories as of March 31, 2004 and 2003:
TARGET ASSET PERCENTAGE OF
ALLOCATIONS PLAN ASSETS
JUNE 30, 2004 2004 2003
------------- ------ ------
Equity securities 50.0% 46.9% 34.0%
Fixed income instruments 50.0% 47.8% 61.8%
Cash equivalents - 5.3% 4.2%
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
The Company's defined benefit plan assets are managed by institutional
investment managers. Target investment allocation rates have been developed for
the pension plans with consideration for the population. Overall, the plans have
a normal mix of active and retired participants. The plans allow for small
variations from the target percentages to allow for anticipated fluctuations in
the market, allowing the plans' to meet the investment goal of the assets
equaling the liabilities of the plans as they are due.
Plan assets of one of the plans includes 15,156 shares of Federal Screw Works
common stock which had a market value of $550,000 at June 30, 2004 and June 30,
2003.
The Company's contributions to the defined benefit plans in fiscal 2005 are
estimated to be $1,200,000.
The assumptions used in the calculation of amounts recognized for the Company's
benefit plans are as follows:
PENSION BENEFITS POSTRETIREMENT BENEFITS
2004 2003 2004 2003
---- ---- ---- ----
Discount rate 6.0% 6.5% 6.0% 6.0%
Expected return on plan assets 8.0% 8.0% - -
Rate of salary increase 5.0% 5.0% - -
The net periodic pension cost for fiscal 2004 and 2003 was based on a long-term
asset rate of return of 8.0%. This rate is based upon management's and the
investment advisor's estimate of future long-term rates of return on similar
assets and is consistent with historical returns on assets. Using the plans'
current mix of assets and adjusting for current market trends for this broadly
diversified portfolio, an expected rate of return of 8.0% continues to be
justified.
The future benefits to be paid are as follows:
POSTRETIREMENT
PENSION BEFORE MEDICARE BENEFITS EXPECTED NET OF MEDICARE
BENEFITS SUBSIDY MEDICARE SUBSIDY SUBSIDY
Fiscal 2005 $ 1,331,000 $ 1,406,000 $ - $ 1,406,000
Fiscal 2006 1,362,000 1,457,000 78,000 1,379,000
Fiscal 2007 1,395,000 1,512,000 80,000 1,432,000
Fiscal 2008 1,429,000 1,568,000 82,000 1,486,000
Fiscal 2009 1,466,000 1,628,000 84,000 1,544,000
Fiscal 2010 through 2014 7,945,000 9,148,000 452,000 8,696,000
27
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FEDERAL SCREW WORKS
NOTE 7 - INDUSTRY INFORMATION
Approximately 93% of the Company's net sales in fiscal 2004, 93% in fiscal 2003
and 91% in fiscal 2002 were made either directly or indirectly to automotive
companies.
Customers comprising 10% or greater of the Company's net sales are summarized as
follows:
2004 2003 2002
---- ---- ----
Ford Motor Company........................ 33% 34% 35%
TRW Automotive............................ 15% 14% 11%
General Motors Corporation................ 12% 12% 13%
All others................................ 40% 40% 41%
--- --- ---
100% 100% 100%
=== === ===
Approximately 18% of the Company's sales are to Canadian customers. All sales
terms provide for payment in U.S. dollars.
The Company operates in one reportable segment, and has not disclosed revenues
by product line or groups of similar product lines, as it is impracticable to do
so.
NOTE 8 - LITIGATION
The Company is involved in various legal actions arising in the normal course of
business. Management, after taking into consideration legal counsel's evaluation
of such actions, is of the opinion that their outcome will not have a
significant effect on the Company's financial statements.
NOTE 9 - COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss) for the years 2004, 2003 and 2002
are as follows:
2004 2003 2002
---------- ----------- ----------
Net earnings $1,249,178 $ 3,302,877 $4,505,395
Change in unrealized loss on securities
available-for-sale, net of taxes 134,400 61,615 10,555
Change in minimum pension liability,
net of taxes 5,080,231 (5,080,231) -
---------- ----------- ----------
Total comprehensive income (loss) $6,463,809 $(1,715,739) $4,515,950
========== =========== ==========
The components of accumulated other comprehensive income (loss) as of June 30,
2004 and 2003 are as follows:
2004 2003
------- -----------
Unrealized gain (loss) on securities
available-for-sale, net of taxes $93,956 $ (40,444)
Minimum pension liability, net of taxes - (5,080,231)
------- -----------
Accumulated other comprehensive
income (loss) $93,956 $(5,120,675)
======= ===========
28
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FEDERAL SCREW WORKS
NOTE 10 - UNAUDITED QUARTERLY OPERATING RESULTS (DOLLARS IN THOUSANDS, EXCEPT
PER SHARE DATA)
1st 2nd 3rd 4th FOR THE
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- -------
2004
Net sales $20,387 $21,842 $24,371 $24,058 $90,658
Gross profit 1,649 1,785 2,428 1,197 7,069
Net earnings 12 103 531 603 1,249
Net earnings per
common share 0.01 0.07 0.37 0.42 0.87
Cash dividends per
common share 0.40 0.10 0.10 0.10 0.70
2003
Net sales 23,180 22,990 25,146 24,062 95,378
Gross profit 2,362 1,800 3,147 3,514 10,823
Net earnings 461 122 908 1,812 3,303
Net earnings per
common share 0.31 0.08 0.61 1.22 2.22
Cash dividends per
common share 0.64 0.08 0.10 0.10 0.92
Net earnings for the fourth quarter of 2004 and 2003 were favorably affected by
year-end adjustments, principally inventory ($455, net of tax, or $0.32 per
share and $362, net of tax, or $0.24 per share, respectively).
Net earnings for the fourth quarter of 2004 includes a non-cash curtailment
charge of $654, net of tax, or $0.46 per share.
NOTE 11 - STOCK REPURCHASE PROGRAM
On December 3, 2003, the Company publicly announced a stock repurchase program.
For a description of the program, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources." The following table summarizes the Company's stock repurchases under
the plan.
TOTAL NUMBER OF MAXIMUM NUMBER
SHARES PURCHASED OF SHARES THAT MAY
TOTAL NUMBER AS PART OF PUBLICLY YET BE PURCHASED
OF SHARES AVERAGE PRICE ANNOUNCED UNDER THE
PERIOD PURCHASED PAID PER SHARE PROGRAM PROGRAM
------ ------------ -------------- ------------------- ------------------
December 2003 3,970 $ 32.50 3,970 181,030
February 2004 8,100 38.34 8,100 172,930
March 2004 4,000 38.15 4,000 168,930
June 2004 10,000 36.55 10,000 158,930
------ ----- ------ -------
Total 26,070 36.73 26,070 158,930
====== ===== ====== =======
29
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Federal Screw Works
St. Clair Shores, Michigan
We have audited the accompanying balance sheet of Federal Screw Works as of June
30, 2004, and the related statements of income, stockholders' equity and cash
flows for the year then ended. Our audit also included the financial statement
schedule listed in the index at Item 15(a)(2) for the year ended June 30, 2004.
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Federal Screw Works as of June
30, 2004, and the results of its operations and its cash flows for the year then
ended, in conformity with U.S. generally accepted accounting principles. Also,
in our opinion, the related financial statement schedule for the year ended June
30, 2004, when considered in relation to the basic 2004 financial statements
taken as a whole, presents fairly in all material respects the information set
forth therein.
/s/ Crowe Chizek and Company LLC
Grand Rapids, Michigan
August 13, 2004
30
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Federal Screw Works
We have audited the accompanying balance sheet of Federal Screw Works as of June
30, 2003 and the related statements of income, stockholders' equity, and cash
flows for each of the two years in the period ended June 30, 2003. Our audits
also included the financial statement schedule listed in the Index at Item 15(a)
for each of the two years in the period ended June 30, 2003. These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Federal Screw Works at June 30,
2003 and the results of its operations and its cash flows for each of the two
years in the period ended June 30, 2003, in conformity with U.S. generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule for each of the two years in the period ended June 30, 2003,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Detroit, Michigan
August 6, 2003
31
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On March 25, 2004, the Company dismissed Ernst & Young LLP ("E&Y") from
its position as the Company's independent auditor and engaged Crowe Chizek and
Company LLC ("Crowe Chizek") as reported on the Form 8-K filed on March 29, 2004
and in the Company's Proxy Statement dated September 27, 2004. In connection
with the change in accountants, there were no disagreements of the type
described in Item 304(a)(1)(iv) of Regulation S-K or any reportable event as
described in Item 304(a)(1)(v) of Regulation S-K.
ITEM 9A. CONTROLS AND PROCEDURES.
The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including its Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of
the Company's disclosure controls and procedures pursuant to Rule 13a-5 of the
Securities Exchange Act of 1934. Based upon that evaluation, the Company's Chief
Executive Officer and Chief Financial Officer concluded that, as of June 30,
2004, the Company's disclosure controls and procedures are effective in timely
alerting them to material information relating to the Company required to be
disclosed in the Company's periodic SEC reports. There have been no significant
changes in the Company's internal controls or in other factors which could
significantly affect internal controls subsequent to the date the company
carried out its evaluation.
ITEM 9B. OTHER INFORMATION.
Inapplicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
Information is contained under the captions "Election of Directors,"
"Audit Committee Financial Expert," "Committees of the Board and Meeting
Attendance," "Security Ownership of Management," and "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Company Proxy Statement dated September
27, 2004 and is incorporated herein by reference. Information contained in Part
I, Item 4A of this document under the caption "Executive Officers of the
Company" is also incorporated herein by reference.
The Company has adopted a Code of Business Conduct and Ethics applicable
to all directors, officers, and employees. The Company will provide a copy of
the Code of Business Conduct and Ethics to any person, without charge, upon
written request to the Corporate Secretary, Federal Screw Works, 20229 Nine Mile
Road, St. Clair Shores, Michigan 48080.
ITEM 11. EXECUTIVE COMPENSATION.
Information is contained under the captions "Director's Remuneration,"
"Officer Compensation Policy," "CEO Compensation Policy," "Compensation
Committee Interlocks and Insider Participation," "Executive Compensation" and
"Comparative Performance Graph" in the Company's Proxy Statement dated September
27, 2004 and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information is contained under the caption "Security Ownership of Certain
Beneficial Owners" and "Security Ownership of Management" in the Company's Proxy
Statement dated September 27, 2004 and is incorporated herein by reference.
The Company does not have any compensation plans under which equity
securities of the Company are authorized for issuance.
32
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information is contained under the caption "Certain Relationships and
Related Transactions" in the Company's Proxy Statement dated September 27, 2004
and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Information is contained under the caption "Relationship with Independent
Accountants, Fees Paid, and Pre-Approval Policy" in the Company's Proxy
Statement dated September 27, 2004 and is incorporated herein by reference.
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES.
(a) Documents filed with this Report or incorporated herein by reference are as
follows:
(1) Financial Statements. The following financial statements of the
Company and Reports of Independent Public Accountants are contained in "Item 8
Financial Statements and Supplementary Data."
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
FINANCIAL STATEMENTS
- Statements of Income for the years ended June 30, 2004,
2003 and 2002
- Balance Sheets as of June 30, 2004 and 2003
- Statements of Stockholders' Equity for the years ended June
30, 2004, 2003 and 2002
- Statements of Cash Flows for the years ended June 30, 2004,
2003 and 2002
NOTES TO FINANCIAL STATEMENTS
(2) Financial Statement Schedules. The following financial statement
schedule is filed with this report and appears on page 34.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Other financial statement schedules have been omitted because they
are not applicable or are not required, or the information required to be
set forth therein is included in the financial statements or notes
thereto.
(3) Exhibits. The Exhibits filed in response to Item 601 of Regulation S-K
are listed in the Exhibit Index attached to this report. The Exhibit Index is
incorporated herein by reference.
33
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS ADDITIONS
(1) (2)
BALANCE AT CHARGED TO CHARGED TO
BEGINNING COSTS AND OTHER ACCOUNTS DEDUCTIONS - BALANCE AT
DESCRIPTION OF PERIOD EXPENSES - DESCRIBE DESCRIBE END OF PERIOD
- ------------------------- ---------- ---------- -------------- ------------ -------------
Valuation allowance for
accounts receivable:
Year ended June 30, 2004 $ 50,000 $ - $ - $ - $ 50,000
Year ended June 30, 2003 50,000 29,000 - 29,000(A) 50,000
Year ended June 30, 2002 50,000 - - - 50,000
Valuation allowance for
inventories:
Year ended June 30, 2004 $ 300,000 $ 81,000 - $ 92,000(B) $ 289,000
Year ended June 30, 2003 260,000 130,000 - 90,000(B) 300,000
Year ended June 30, 2002 325,000 85,000 - 150,000(B) 260,000
(A) Uncollectible accounts receivable charged off; corresponding reduction of
allowance.
(B) Unsalable inventories charged off; corresponding reduction of allowance.
34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FEDERAL SCREW WORKS
(Company)
By: /s/ W. T. ZurSchmiede, Jr.
--------------------------------
W. T. ZurSchmiede, Jr.
Chairman, Chief Financial
Officer and Secretary
Date: September 27, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.
/s/ Wade C. Plaskey September 27, 2004
- -------------------------------------
Wade C. Plaskey
Treasurer and Corporate Controller
(Principal Accounting Officer)
/s/ David W. Ayriss, Sr. September 27, 2004
- -------------------------------------
David W. Ayriss, Sr.
Director
/s/ Thomas W. Butler, Jr. September 27, 2004
- -------------------------------------
Thomas W. Butler, Jr.
Director
/s/ Frank S. Galgan September 27, 2004
- -------------------------------------
Frank S. Galgan
Director
/s/ Hugh G. Harness September 27, 2004
- -------------------------------------
Hugh G. Harness
Director
/s/ F.D. Tennent September 27, 2004
- -------------------------------------
F.D. Tennent
Director
/s/ W. T. ZurSchmiede, Jr. September 27, 2004
- -------------------------------------
W. T. ZurSchmiede, Jr.
Director, Chief Financial Officer and Secretary
(Principal Financial Officer)
/s/ Robert F. ZurSchmiede September 27, 2004
- -------------------------------------
Robert F. ZurSchmiede
Director
35
/s/ Thomas ZurSchmiede September 27, 2004
- -------------------------------------
Thomas ZurSchmiede
Director, President and Chief Executive Officer
(Principal Executive Officer)
36
EXHIBIT INDEX
The following exhibits are filed herewith or incorporated by reference. Each
management contract or compensatory plan or arrangement filed as an exhibit to
this report is identified below with a "+" symbol after the exhibit number. The
Company's SEC file number is 000-01837.
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1 Company's Articles of Incorporation, were filed as an exhibit to
the Company's 1994 Form 10-K, and are incorporated herein by
reference.
3.2 Company's By-Laws, as amended on August 29, 2002 were filed as an
exhibit to the Company's 2002 Form 10-K, and are incorporated
herein by reference.
4.1 The (municipal industrial revenue bond) guarantee agreement dated
as of November 1, 1979, as previously filed, was filed as an
exhibit to the Company's 1993 Form 10-K and is incorporated
herein by reference. All waivers, amendments and modifications
thereto, were filed as exhibits to the Company's 1989, 1993 and
1994 Forms 10-K and are incorporated herein by reference.
4.2 Revolving Credit and Term Loan Agreement by and between the
Company and Comerica Bank, dated October 24, 1995, filed as an
exhibit to the Company's Form 10-Q for the period ended September
30, 1995, and incorporated herein by reference.
4.3 One year extension of Revolving Credit and Term Loan Agreement by
and between the Company and Comerica Bank, dated October 17,
2003, filed as an exhibit to the Company's Form 10-Q for the
quarter ended September 30, 2003, and incorporated herein by
reference.
10.1+ Supplemental retirement agreement between the Company and W. T.
ZurSchmiede, Jr., present Chairman of the Company, dated April 1,
1986 was filed as an exhibit to Company's 1993 Form 10-K and is
incorporated by reference.
10.2+ Supplemental retirement agreement between the Company and Hugh G.
Harness, a director and past President of the Company, dated
December 21, 1978 and amended pursuant to an Amendment to
Agreement dated October 23, 1986, as amended by an Agreement
providing for the retirement and consultation of and by Mr.
Harness and the Company dated January 7, 1994, was filed as an
exhibit to Company's 1994 Form 10-K, and is incorporated herein
by reference.
10.3 Agreement providing for the retirement and consultation of and by
Mr. Harness and the Company dated January 7, 1994, as amended on
October 25, 2001, was filed as an exhibit to the Company's 2002
Form 10-K, and is incorporated herein by reference.
10.4+ Indemnity agreement effective September 24, 1986, which exists
between the Company and each director, was filed as an exhibit to
Company's 1992 Form 10-K, and is incorporated herein by
reference.
10.5 Lease agreement between the Company and Safran Development,
L.L.C. for the lease of the 2nd floor of 20229 Nine Mile Road,
St. Clair Shores, Michigan, effective October 26, 1999, was
previously filed as an exhibit to the Company's Form 10-Q for the
quarter ended September 30, 1999, and is incorporated herein by
reference.
10.6+ Retirement Plan for Outside Directors as amended and restated,
filed as an exhibit to the Company's 1995 Form 10-K and
incorporated herein by reference.
37
EXHIBIT INDEX (CONTINUED)
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.7+ Supplemental Executive Retirement Plan dated July, 1998, filed as
an exhibit to the Company's 1998 Form 10-K and incorporated
herein by reference.
31.1 Certification of the Chief Executive Officer of Company, dated
September 27, 2004, relating to the Company's 2003 Form 10-K,
filed herewith.
31.2 Certification of the Chief Financial Officer of Company, dated
September 27, 2004, relating to the Company's 2003 Form 10-K,
filed herewith.
32.1 Certification of Chief Executive Officer, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, filed herewith.
32.2 Certification of Chief Financial Officer, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, filed herewith.
38